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University  of  Calif  ornia  •  Berkeley 


Government  Regulation 
of  Railways 


An  Address 
WILLIAM  F.  HERRIN 


NOVEMBER  20,  1913,  AT  SAN  DIEGO,  CALIFORNIA 
ANNUAL  MEETING  CALIFORNIA  BAR  ASSOCIATION 


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Government  Regulation  of 
Railways 


It  might  be  expected,  especially  as  I  am  address- 
ing a  body  of  lawyers,  that  in  dealing  with  my  sub- 
ject I  would  consider  some  of  the  interesting 
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COMPLIMENTS 


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disadvantage  of  the  other.  In  adopting  this  line 
of  discussion,  I  assume  that  the  public  interest 
is  of  first  importance  and  my  purpose  is  to  con- 
sider how  that  interest  can  best  be  promoted.  I 
am  not  here  to  make  a  special  plea  for  railway 
interests,  but  shall  attempt,  from  an  independent 
and  impartial  standpoint,  to  arrive  at  the  prin- 
ciples which  should  govern  the  proper  exercise  of 
this  regulative  function.  Naturally,  with  the 
lawyer's  habit,  I  shall  cite  authorities  to  sustain 
my  views  —  not  by  any  means  all  the  authorities 
which  might  be  cited,  for  I  shall  ignore  all  who  have 
been  identified  with  railway  management  or  serv- 


KM- 


Government  Regulation  of 
Railways 


It  might  be  expected,  especially  as  I  am  address- 
ing a  body  of  lawyers,  that  in  dealing  with  my  sub- 
ject I  would  consider  some  of  the  interesting 
legal  questions  which  have  arisen  in  connection 
with  the  public  regulation  of  railways,  but  the 
greater  importance  of  the  economic  and  financial 
issues  involved  have  induced  me  to  discuss 
them  rather  than  the  more  purely  legal  as- 
pects of  the  question.  If,  in  railway  regulation, 
our  aim  is  to  subserve  and  advance  the  public 
welfare,  we  are  aided  but  little  by  a  too  exclusive 
reliance  upon  mere  legal  learning.  Our  true  en- 
lightenment must  come  from  a  study  of  the  eco- 
nomic and  financial  conditions  involved.  We  can 
thus  more  clearly  discern  the  public  interests 
affected  and  more  readily  understand  that  these 
interests  are  not  really  antagonistic  to  those  of  the 
railways.  On  the  contrary,  these  interests  are 
interdependent,  and  an  injury  to  one  works  to  the 
disadvantage  of  the  other.  In  adopting  this  line 
of  discussion,  I  assume  that  the  public  interest 
is  of  first  importance  and  my  purpose  is  to  con- 
sider how  that  interest  can  best  be  promoted.  I 
am  not  here  to  make  a  special  plea  for  railway 
interests,  but  shall  attempt,  from  an  independent 
and  impartial  standpoint,  to  arrive  at  the  prin- 
ciples which  should  govern  the  proper  exercise  of 
this  regulative  function.  Naturally,  with  the 
lawyer's  habit,  I  shall  cite  authorities  to  sustain 
my  views — not  by  any  means  all  the  authorities 
which  might  be  cited,  for  I  shall  ignore  all  who  have 
been  identified  with  railway  management  or  serv- 


ice,  however  able  or  experienced  they  may  be, 
and  will  content  myself  with  citing  only  those 
whose  study  of  the  subject  from  an  independent 
standpoint  makes  their  conclusions  worthy  of  our 
serious  consideration,  and  whose  record  and  posi- 
tion in  public  life  lend  no  critic  the  opportunity 
of  saying  that  they  are  biased  in  favor  of  railway 
interests. 

One  of  the  leading  members  of  the  Interstate 
Commerce  Commission  in  point  of  ability  and 
experience — Hon.  Charles  A.  Prouty — recently 
said  in  his  address  before  the  National  Associa- 
tion of  Railway  Commissioners  that: 

"The  United  States  is  trying  an  ex- 
periment which  never  has  been  success- 
fully worked  out  yet  in  the  history  of  the 
world.  It  is  trying  to  build,  develop  and 
operate  its  railroads  by  private  capital 
under  rates  and  regulations  fixed,  not  by 
the  owners  of  that  capital,  but  by  the 
public." 

This  authoritative  statement  challenges  our 
attention.  From  it  we  apprehend  that  the  scheme 
of  public  regulation  of  railways  in  this  country  is 
on  trial,  and  we  realize  the  novelty  of  this  experi- 
ment and  appreciate  its  tremendous  importance, 
not  only  to  the  owners  of  the  billions  of  private 
capital  involved,  but  to  the  public  which  is  vitally 
interested  in  these  modern  highways  of  transpor- 
tation. How  to  balance  and  harmonize  these 
enormous  interests  might  well  perplex  the  ablest 
minds.  The  difficulties  of  the  problem  which 
must  be  solved  no  doubt  question  the  wisdom 
of  this  experiment,  but  it  would  be  idle  to  stop  now 
to  discuss  whether  or  not  the  present  scheme  of 
regulation  should  have  been  adopted.  It  will  not 
be  abandoned  because  of  difficulties  which  may 


arise — it  must  proceed  to  its  conclusion  of  success 
or  failure. 

But  it  is  profitable,  for  a  moment,  to  recall  the 
evils  which  arose  in  the  administration  of  railways 
before  their  public  regulation  was  attempted. 

No  principle  is  more  vital  in  railway  administra- 
tion than  that  there  shall  be  no  unjust  discrimina- 
tion between  shippers  as  to  service  rendered  or  the 
rates  charged  therefor.  Unless  all  shippers  pay 
the  same  rates  for  the  same  service,  it  would  be 
possible  for  the  favored  shipper  to  cripple  or  des- 
troy his  business  rival.  There  could  be  no  more 
insidious  or  vicious  practice  than  to  favor  one 
shipper  or  class  of  shippers  at  the  expense  of  others. 
Such  a  disturbing  force  would  prevent  any  sound 
business  development  and  would  be  corruptive 
and  destructive  in  its  tendencies.  Yet  these 
vicious  discriminations  were  frequent  before  they 
were  abolished  by  the  force  of  government  regu- 
lation. Before  such  regulation,  not  only  was  the 
commercial  business  of  the  country  prejudicially 
affected  by  the  giving  of  rebates  or  secret  rates, 
but  such  practice  no  doubt  tended  to  impair  the 
security  of  railway  investments.  At  least  we  know 
that  railroad  bankruptcies  and  receiverships  were 
more  frequent  in  the  days  of  rate-cutting  than 
they  are  now,  and  while  other  causes  may  have 
contributed  to  such  bankruptcies,  yet  it  is  certain 
that  the  cut-throat  competition  between  railroads 
by  means  of  rebates  was  in  some  measure  re- 
sponsible for  the  uncertain  conditions  of  railroad 
finance.  These  conditions  were  intolerable  to 
railroad  management,  and  in  justice  to  railroad 
managers  it  must  be  said  that  they  were  the 
victims  of  the  business  practices  of  the  time.  The 
traffic  manager  could  not  secure  business  for  his 
road  unless  he  met  the  rates  given  secretly  by  his 
competitor.  However  much  he  might  desire  to 
maintain  his  published  rates  and  deal  fairly  with 


all  his  patrons,  he  was  forced,  in  competition  with 
other  carriers,  to  the  giving  of  secret  rates.  Such 
practices  could  not  be  stopped  except  by  govern- 
ment regulation,  for  one  carrier  could  set  the  pace 
which  all  its  competitors  must  follow.  Undoubt- 
edly, the  removal  of  this  one  evil  of  secret  rates 
and  rebates  fully  justified  government  regulation, 
and  I  think  no  railroad  manager  would  agree  to 
dispense  with  government  regulation  at  the  cost 
of  returning  to  the  old  conditions.  No  one  fa- 
miliar with  the  history  of  this  subject  can  doubt 
that  the  provisions  of  the  Interstate  Commerce 
Law,  enforcing  strict  compliance  with  the  tariffs 
filed,  have  been  of  great  benefit  to  the  railroads, 
and  I  think  we  should  not  doubt  the  sincerity  of 
the  leading  railroad  officials  when  they  state  that 
they  accept  government  regulation  and  are,  in 
good  faith,  aiding  in  the  enforcement  of  the  law. 
Not  only  in  the  enforcement  of  the  tariff  rates, 
but  in  other  important  particulars,  is  the  law  help- 
ful to  railroad  interests.  For  example,  in  the  mak- 
ing of  tariffs,  especially  before  government  regu- 
lation, the  carriers  were  often  induced — I  might 
say  compelled — to  publish  rates  which  unjustly 
discriminated  as  between  persons  or  places.  Ship- 
pers offering  large  tonnage  were  frequently  able, 
as  the  consideration  for  their  patronage,  to  secure 
more  favorable  rates  than  were  given  to  smaller 
shippers,  and  important  and  influential  business 
centers  often,  for  similar  reasons,  were  able  to  se- 
cure advantages  over  smaller  communities  which 
should  not  have  been  given.  The  action  of  a  com- 
mission in  removing  such  discriminations  would 
be  accepted  by  the  parties  interested,  whereas, 
should  the  railways  alone  attempt  to  do  this, 
they  would  provoke  hostility  upon  the  part  of 
those  who  might  have  the  power  of  injuring  them. 
In  other  words,  there  are  many  questions  which 
must  arise  between  the  railways  and  their  patrons 


which  should  be  determined  by  some  impartial 
arbiter,  and  in  all  such  cases  it  is  for  the  best 
interest  of  the  railways  that  a  tribunal  should  be 
provided  to  determine  these  questions.  I  have  said 
this  much  to  show  that  the  railways  have  good 
reason  to  accept  any  rational  and  fair  scheme 
of  regulation  administered  with  reason  and 
impartiality. 

How,  then,  arises  the  doubt  in  the  mind  of 
Interstate  Commerce  Commissioner  Prouty  that 
the  scheme  of  railway  regulation  adopted  in  the 
United  States  may  not  be  successful? 

He  says: 

"The  question  is  here,  Can  you  obtain 
under  this  system  (of  regulation)  the  new 
money  which  is  necessary  to  develop  our 
old  railroad  systems  and  to  build  our  new 
railroad  systems?  That  is  the  crucial 
question." 

Upon  this  point  he  further  says: 

"When  the  Interstate  Commerce  Com- 
mission makes  an  order,  which  possibly 
means  $1,000,000  a  year  to  the  carriers 
affected  by  it,  $20,000,000  upon  a  five  per 
cent,  basis,  in  one  single  bite,  you  cannot 
help  feeling  the  load  of  responsibility 
which  goes  with  the  making  of  the  order 
*  *  *  It  is  the  duty  of  the  railroad 
commissioner  to  most  scrupulously  pro- 
tect the  railroad,  and  to  mete  out  to  the 
railroad  the  most  exact  justice.  It  is  com- 
ing to  be  apprehended  that  that  is  re- 
quired, not  merely  as  a  measure  of  justice 
to  the  railway,  but  as  a  measure  of  right 
in  the  interest  of  the  public. 

"The  railroad  is  a  public  servant.   That 


phrase  comes  to  us  from  the  Supreme 
Court,  and  has  been  for  a  quarter  of  a 
century  in  the  mouth  of  everybody  who 
has  to  do  with  this  subject.  It  comes, 
as  time  goes  on,  to  take,  on  a  different 
meaning.  Originally,  the  people  said, 
'The  railroad  is  our  servant,  therefore 
we  can  kick  the  railroad  and  cuff  the 
railroad  ad  libitum.' 

"It  is  coming  to  be  understood,  gentle- 
men, that  just  as  your  servant  can  only 
properly  discharge  his  duties,  when  he  is 
suitably  fed,  suitably  clothed,  and  suit- 
ably housed,  so  the  railroad  can  only  prop- 
erly discharge  its  duties  when  it  receives 
proper  treatment  from  the  public.  It  is 
coming  to  be  apprehended  that  in  the 
final  analysis,  the  public  pays  the  bill 
and  that  it  pays  for  us,  as  railroad  com- 
missioners, to  accord  to  the  railroad  just 
and  fair  treatment.  That,  I  say,  is  not 
only  demanded  by  justice — it  is  demanded 
by  public  interest." 

It  certainly  needs  no  argument  to  sustain  the 
views  thus  clearly  expressed  by  one  so  competent 
to  speak  upon  this  important  subject.  Mr. 
Prouty  has  no  bias  in  favor  of  railroad  interests. 
He  speaks  from  the  standpoint  of  public  interest, 
and  his  long  and  notable  record  of  public  service 
requires  us  to  give  serious  consideration  to  his 
views.  He  advances  no  doubtful  premises  or 
argument;  on  the  contrary,  his  statements  are 
obvious  and  self-evident  truths  which  any  fair- 
minded  person  must  recognize. 

No  one  will  question  the  dependence  of  this 
country  upon  its  railways.  No  other  factor  has 
been  so  important  in  our  national  development, 
and  if  our  country  is  to  advance  it  must  have 


adequate  transportation  facilities.  Interstate 
Commerce  Commissioner  Franklin  K.  Lane  has 
well  said  that: 

"The  railroad  is  our  common  high- 
road; it  is  not  a  luxury;  it  is  not  a  concern 
in  which  the  farmer  and  the  manufacturer 
alone  are  interested;  it  is  an  essential  to 
the  commercial  life  of  our  people,  almost 
as  necessary  as  the  land  itself,  for  we  have 
grown  up  as  a  people  to  be  physically  de- 
pendent upon  our  railroads.  No  other 
people  are  so  bound  up  as  are  we  in  eco- 
nomic inter-dependence.  No  one  com- 
munity in  all  this  land  lives  to  itself.  We 
have  grown  as  railroads  were  built.  We 
have  made  a  community  of  a  continent." 

To   the   same   effect   I   quote   from   Theodore 
Roosevelt: 

"The  great  need  of  the  hour,  from  the 
standpoint  of  the  general  public — of  the 
producer,  consumer  and  shipper  alike — 
is  the  need  for  better  transportation,  fa- 
cilities, for  additional  tracks,  additional 
terminals,  and  improvements  in  the  act- 
ual handling  of  the  railroads,  and  all  this 
with  the  least  possible  delay.  Ample, 
safe  and  rapid  transportation  facilities 
are  even  more  necessary  than  cheap  trans- 
portation. The  prime  need  is  for  the 
investment  of  money  which  will  provide 
better  terminal  facilities,  additional 
tracks,  and  a  greater  number  of  cars  and 
locomotives,  while  at  the  same  time  secur- 
ing, if  possible,  better  wages  and  shorter 
hours  for  the  employees.  There  must  be 
just  and  reasonable  regulation  of  rates, 
but  any  arbitrary  and  unthinking  move- 


ment  to  cut  them  down  may  be  equiva- 
lent to  putting  a  complete  stop  to  the  effort 
to  provide  better  transportation." 

In  order  to  equip  our  railroads  to  meet  the 
demands  upon  them,  and  to  keep  pace  with  the 
development  of  the  country,  large  amounts  of 
private  capital  must  be  provided.  Many  hun- 
dreds of  millions  of  dollars  annually  are  required 
for  this  purpose.  During  recent  years  the  rail- 
roads, because  of  the  difficulty  of  securing  the 
necessary  capital,  have  not  been  able  to  make  the 
extensions  and  improvements  requisite  to  meet 
extraordinary  conditions  which  have  occurred 
and  may  occur  again  at  any  time,  such  as  a  large 
agricultural  crop  throughout  the  country,  or 
traffic  movements  required  in  case  of  war,  etc. 
As  a  consequence  the  railways  may  be  said  to 
have  fallen  behind  the  country's  progress  and 
necessities. 

How  far  new  capital  is  required  for  the  improve- 
ment of  our  railways  has  been  given  careful  con- 
sideration by  the  Railroad  Securities  Commission, 
appointed  by  the  President  under  an  Act  of  Con- 
gress, which  made  its  report  in  November,  1911. 
President  Hadley  of  Yale  was  chairman  of  this 
Commission  and  his  associates  were  men  of  high 
character  and  ability.  The  report  of  this  Com- 
mission says: 

"There  is  a  widespread  belief,  based 
on  imperfect  examination  of  the  evidence, 
that  the  amount  of  capital  needed  for  the 
future  development  of  our  railroad  sys- 
tem is  small  in  proportion  to  that  which 
has  been  required  in  the  past;  that  the 
profits  on  such  added  investments  of  capi- 
tal are  reasonably  well  assured;  and  that 
we  can  therefore  fix  attention  predomi- 
nantly, if  not  exclusively,  on  the  needs  of 

10 


the  shipper  without  interfering  with  the 
necessary  supply  of  new  money  from  the 
investors. 

"It  is  quite  possible  that  the  building  of 
additional  railroad  mileage  will  be  far 
less  rapid  in  the  future  than  it  has  been 
in  the  past,  but  the  capital  needed  for  the 
development  and  the  improvement  of  the 
mileage  already  existing  is  enormous, 
even  if  we  built  no  new  mileage  at  all. 
The  outstanding  stock  and  debt  of  the 
railways  in  the  United  States  averages 
less  than  $60,000  a  mile  of  line.  This 
figure  is  bound  to  be  greatly  increased  in 
the  immediate  future.  As  our  popula- 
tion grows  denser,  we  shall  need  more 
and  more  to  approximate  European 
standards  of  construction  by  the  in- 
creased amount  of  double  track,  the 
abolition  of  grade  crossings,  the  develop- 
ment of  station  facilities  both  for  passen- 
gers and  for  freight,  and  many  other  im- 
provements scarcely  less  fundamental. 
While  our  railroads  are  perhaps  even 
better  equipped  than  those  of  Europe 
for  the  economical  handling  of  large 
masses  of  long  distance  freight,  they  are 
far  from  being  adequately  provided  with 
appliances  to  secure  the  convenience  of 
the  public  or  the  safety  of  passengers  and 
employees.  The  cost  of  all  these  things  is 
very  great.  The  average  capitalization  per 
mile  of  railroads  in  Germany  is  $109,000, 
in  France  $137,000,  in  Belgium  $177,- 
000,  in  Great  Britain  $265,000;  and,  con- 
trary to  the  commonly  received  opinion, 
much  of  this  excess  of  cost  as  compared 
with  American  roads,  is  due  to  other 
causes  than  the  price  of  real  estate — an 


item  in  which  our  companies  have  had  a 
great  advantage.  The  cost  of  European 
roads  has  been  largely  due  to  improve- 
ments which  we  have  not  yet  made  and 
many  of  which  we  must  make  in  the  future 
as  population  grows  denser.  The  thou- 
sands of  millions  of  dollars  needed  for 
these  purposes  must  be  raised  by  the  sale 
of  securities." 

Now,  can  the  railroads,  under  present  conditions, 
offer  securities  upon  which  the  needed  funds  can 
be  obtained? 

Upon  this  point  the  Railroad  Securities  Com- 
mission say: 

"Neither  the  rate  of  return  actually 
received  on  the  par  value  of  American 
railroad  bonds  and  stocks  today,  nor  the 
security  which  can  be  offered  for  addi- 
tional railroad  investments  in  the  future, 
will  make  it  easy  to  raise  the  needed 
amount  of  capital. 

"The  ratio  of  interest  and  dividends  to 
outstanding  bonds  and  stocks  of  Ameri- 
can railroads  is  not  quite  four  and  a  half 
per  cent,  in  each  case.  The  average  ratio 
of  dividends  to  the  capital  of  national 
banks  is  between  ten  and  eleven  per  cent. 
If  it  be  objected  that  the  value  of  the 
stocks  of  our  railroads  is  in  considerable 
measure  due  to  the  growth  of  the  com- 
munity rather  than  to  the  cash  originally 
invested,  and  that  the  bonds  and  stocks 
of  railroads  should  therefore  be  com- 
pared with  the  combined  capital  and  sur- 
plus of  the  national  banks,  we  find  that 
these  banks  have  for  the  last  three  years 
maintained  an  average  ratio  of  dividends 


12 


to  capital  and  surplus  combined  of  over 
six  and  a  half  per  cent.  If  we  look  not  at 
the  sums  divided,  but  at  the  sums  earned, 
we  find  the  same  difference  of  profit  in 
favor  of  the  banks." 

And  further  this  report  says: 

"We  hear  much  about  a  reasonable 
return  on  capital.  A  reasonable  return 
is  one  which  under  honest  accounting  and 
responsible  management  will  attract  the 
amount  of  investors'  money  needed  for  the 
development  of  our  railroad  facilities. 
More  than  this  is  an  unnecessary  public 
burden.  Less  than  this  means  a  check  to 
railroad  construction  and  to  the  develop- 
ment of  traffic.  Where  the  investment  is 
secure,  a  reasonable  return  is  a  rate  which 
approximates  the  rate  of  interest  which 
prevails  in  other  lines  of  industry. 
Where  the  future  is  uncertain  the  in- 
vestor demands,  and  is  justified  in  de- 
manding, a  chance  of  added  profit  to  com- 
pensate for  his  risk.  We  cannot  secure 
the  immense  amount  of  capital  needed  un- 
less we  make  profits  and  risks  commensu- 
rate. If  rates  are  going  to  be  reduced 
whenever  dividends  exceed  current  rates 
of  interest,  investors  will  seek  other  fields 
where  the  hazard  is  less  or  the  opportun- 
ity greater.  In  no  event  can  we  expect 
railroads  to  be  developed  merely  to  pay 
their  owners  such  a  return  as  they  could 
have  obtained  by  the  purchase  of  invest- 
ment securities  which  do  not  involve  the 
hazards  of  construction  or  the  risks  of 
operation." 


13 


So  we  have  this  problem  in  a  nutshell.  The 
railways  cannot  compete  with  other  industries 
in  obtaining  money  for  their  needs  unless  their 
earnings  approximate  the  rate  of  return  gained 
by  such  industries.  If  railway  earnings  are  less 
than  this,  capital  will  seek  investment  in  other 
securities,  leaving  the  railways  without  funds 
needed.  The  securities  offered  by  railroads  must, 
at  least,  equal  in  attractiveness  those  offered  by 
other  industries,  or  capital  will  avoid  railroad 
investments. 

It  is  a  matter  of  common  knowledge  that  for 
the  last  three  or  four  years  it  has  been  very  diffi- 
cult for  the  railroads  to  secure  upon  any  reason- 
able terms  the  money  actually  needed  by  them. 
I  do  not  ignore  the  fact  that  the  stringency  of  the 
money  market  affects  all  other  enterprises,  in- 
cluding the  efforts  of  states  and  municipalities 
to  borrow  money.  But  the  railways  are  under 
special  disadvantage  in  that  they  cannot  raise 
their  rates  without  the  consent  of  governmental 
authority,  while  other  corporations  and  indi- 
viduals, free  from  such  regulation,  may  raise 
their  prices  and  thus  secure  a  return  to  meet  new 
financial  conditions — and  State  and  municipal 
corporations  may,  of  course,  rely  upon  the  prac- 
tically unrestrained  power  of  taxation  to  secure 
necessary  funds. 

Now  if  the  present  tariff  rates  were  certain  to 
be  continued,  so  long  as  the  earnings  were  neces- 
sary to  the  finances  of  the  railways,  it  would  still 
be  difficult  under  present  conditions  for  them  to 
secure  the  money  urgently  needed  for  improve- 
ments. But  the  railways  cannot  deal  with  this 
subject  upon  the  assurance  that  present  rates  will 
be  continued;  on  the  contrary,  rate  reductions  are 
being  made  from  time  to  tune  by  the  Interstate 
Commerce  Commission  and  by  State  railroad 
commissions,  and  applications  for  increase  in 

14 


rates  have  generally  been  unsuccessful,  so  that 
the  governmental  power  to  fix  rates  overshadows 
the  situation  as  a  menace  which  makes  it  prac- 
tically impossible  at  the  present  time  for  the  rail- 
ways to  secure  any  longtime  loans,  or  any  loans 
upon  reasonable  rates  of  interest. 

I  assume  that  present  financial  conditions  are 
temporary,  and  that  in  the  near  future  we  may 
expect  the  return  to  normal  conditions;  it  is  in 
view  of  such  normal  conditions  that  we  should 
consider  these  questions,  and  if  we  assume  the 
most  favorable  financial  conditions,  the  fact  still 
remains  that  the  Interstate  Commerce  Commis- 
sion, and  the  State  railroad  commissions,  with  the 
power  vested  in  them  to  fix  rates,  may  make  it 
difficult,  if  not  impossible,  for  the  railroads  to 
obtain  the  money  needed.  That  is  to  say,  if  the 
power  of  regulation  is  so  exercised  as  to  force 
reductions,  which,  if  accepted,  must  result  in 
bankruptcy,  the  relief  which  might  be  given  by 
the  courts  after  tedious  and  costly  litigation 
would  hardly  invite  the  investment  of  private 
capital.  Even  though  the  capital  already  invested 
could  be  protected  against  arbitrary  reductions, 
it  could  not  be  expected  that  new  capital  would 
be  found  to  run  the  risk  of  further  litigation,  and, 
as  President  Roosevelt  has  said,  an  arbitrary  rate 
reduction  might  put  a  complete  stop  to  the  effort 
to  provide  better  transportation.  So  we  are  forced 
to  the  conclusion  that  it  rests  with  the  railroad 
commissions,  state  and  national,  to  determine 
how  far,  if  at  all,  the  railroads  of  this  country 
shall  be  extended  and  improved  by  means  of 
private  capital. 

In  his  address,  from  which  I  have  already 
quoted,  Mr.  Prouty,  in  referring  to  the  fact  that 
practically  all  railroad  building  in  Canada  was 
aided  by  government  subsidies,  said: 


"We  may  come  to  that  same  idea.  We 
may  conclude  that  railroads  ought  not  to 
be  allowed  to  charge  rates  which  will  in- 
duce the  building  of  new  railroads  by 
private  capital.  Perhaps  that  ought  to  be 
the  conclusion,  but  what  I  say  now  is  that 
upon  the  manner  in  which  you  gentlemen 
(the  Railroad  Commissioners  of  the  dif- 
ferent States)  deal  with  this  subject  of  rail- 
road regulation,  very  intimately  depends 
the  success  with  which  this  experiment  is 
to  be  worked  out,  and  the  future  of  that 
question  in  this  country  of  ours." 

The  experiment  to  which  Mr.  Prouty  refers  is, 
as  stated  in  his  own  language,  the  building,  de- 
velopment and  operation  of  the  railways  of  this 
country  "by  private  capital,  under  rates  and 
regulations  fixed,  not  by  the  owners  of  that  capi- 
tal, but  by  the  public." 

Now,  what  are  the  difficulties,  if  any,  which 
stand  in  the  way  of  the  success  of  this  "experi- 
ment"? First  let  us  define  this  power  of  regula- 
tion, and  mark  its  boundaries  and  limitations. 

The  Supreme  Court  of  the  United  States  has 
more  than  once  said  that  this  "power  of  regula- 
tion is  not  the  power  to  destroy."  There  is  noth- 
ing inherent  in  the  power  of  regulation  which 
should  make  it  a  destructive  force.  On  the  con- 
trary, there  is.no  good  reason  why  it  should  not 
secure  every  public  interest  without  impairing 
the  investments  which  have  produced  the  rail- 
ways of  the  country. 

Again,  in  speaking  of  this  power  of  regulation, 
the  Supreme  Court  of  the  United  States  recently 
said: 

"It  must  be  remembered  that  railroads 
are  the  private  property  of  their  owners; 
that  while,  from  the  public  character  of 

16 


the  work  in  which  they  are  engaged,  the 
public  has  the  power  to  prescribe  rules 
for  securing  faithful  and  efficient  service 
and  equality  between  shippers  and  com- 
munities, yet  in  no  proper  sense  is  the 
public  a  general  manager." 

And  the  court,  in  the  opinion  from  which  I 
quote,  goes  on  to  define  the  power  or  function  of 
regulation  to  be  the  enforcement  of  two  leading 
prohibitions  against  the  railways,  viz.:  (1)  "that 
their  charges  shall  not  be  unjust  or  unreasonable," 
and  (2)  "that  they  shall  not  unjustly  discriminate 
so  as  to  give  undue  preference  or  disadvantage  to 
persons  or  traffic  similarly  circumstanced." 

Now,  certainly,  the  removal  or  prevention  of 
unjust  or  unreasonable  rates,  and  of  unjust  dis- 
crimination, would  strengthen  rather  than  weaken 
the  railways,  and  if  the  regulative  power  had  been 
exercised  strictly  within  the  definitions  of  the 
United  States  Supreme  Court  there  could  be  no 
serious  question  that  the  experiment  of  govern- 
ment regulation  would  prove  successful — that  is 
to  say,  the  railways  of  this  country  could  be  ex- 
tended, maintained  and  operated  to  their  highest 
efficiency  by  means  of  private  capital,  and  with- 
out financial  aid  from  the  government. 

Since  the  era  of  railway  bankruptcies  and  re- 
ceiverships in  the  early  nineties,  the  commercial 
and  business  development  of  the  country  has 
largely  increased.  For  example,  comparing  the 
years  1892  and  1912  we  find  that  the  freight  tons 
carried  one  mile  increased  202.9%  and  the  pas- 
sengers carried  one  mile  increased  150.8%.  Be- 
cause of  reductions  in  rates  this  increased  volume 
of  business  in  1912  produced  only  59.9%  more 
revenue  than  was  earned  in  1892. 

While  owing  to  the  increasing  volume  of  traffic 
many  roads  are  able  to  show  an  increase  in  gross 


17 


earnings,  the  increasing  expenses  of  operation 
almost  uniformly  reduce  the  net  earnings.  For 
example,  between  the  years  1907  and  1911,  the 
railways  of  the  United  States  put  into  their 
property  over  two  billion  dollars  new  capital,  yet 
they  received  over  eight  million  dollars  less  net 
earnings  than  were  received  by  them  in  1907  be- 
fore this  two  billions  of  new  capital  was  invested. 

These  striking  facts  explain  the  decline  of  rail- 
way credit,  and  the  practical  inability  of  the  rail- 
ways at  the  present  time  to  secure  the  new  capi- 
tal needed  by  them.  It  is  no  exaggeration  to  say 
that  railway  financial  conditions  are  critical.  Yet, 
the  broad  fact  remains  that  the  sparsity  of  traffic 
which  in  1892  contributed  to  railroad  bank- 
ruptcies no  longer  exists.  The  main  lines  of  road 
almost  without  exception  now  enjoy  a  volume  of 
traffic  sufficient,  with  reasonable  rates,  to  ensure 
their  successful  operation,  and  this,  notwithstand- 
ing the  largely  increased  expenses  of  operation. 

We  may  here  naturally  inquire  how  far  the 
expenses  of  operation  have  been  increased  through 
governmental  regulation.  This  includes  legisla- 
tion, state  and  national,  which  has  contributed 
many  conditions  requiring  increased  expenses, 
such  as  laws  regulating  the  hours  of  service, 
safety  appliances,  separation  of  grades,  full  crews, 
headlights,  standards  of  construction,  etc.  Then 
the  cost  of  complying  with  orders  of  commissions, 
state  and  national,  as  to  keeping  of  records  and 
statistics  and  furnishing  copies  of  same  is  con- 
siderable. The  increase  in  wages  has  added  very 
greatly  to  the  cost  of  operation.  Congress,  by 
the  enactment  of  what  is  called  the  Newland's 
law,  which  is  a  development  of  the  former  Erd- 
man  act,  has  provided  a  method  for  the  arbitra- 
tion of  labor  disputes.  In  order  to  avoid  strikes 
this  law  must  be  invoked  and  in  so  far  as  the  offi- 
cers of  the  government  participate  in  the  pro- 


ceedings  under  this  law  they  must  share  the  re- 
sponsibility for  the  resulting  increase  in  wages, 
if  any. 

Then  we  have  also  the  increase  in  taxation, 
which,   comparing  the  years   1892   and   1912,   is 
more  than  250%.    Throughout  the  United  States 
the  railways  pay  in  taxes  4.21%  of  their  gross. 
earnings.     In  California  we  are  required  to  pay 


All  these  items  of  expense  should  be  regarded 
by  the  railway  commissions,  state  and  national, 
in  their  decisions  as  to  the  reasonableness  of  rates, 
and  where,  through  no  fault  of  the  railway,  ex- 
penses of  operation  have  increased,  it  is  difficult 
to  understand  why  compensatory  increases  in 
rates  should  not  be  allowed.  If  such  compensa- 
tory increases  were  permitted,  no  question  would 
arise  as  to  the  adequacy  of  private  capital  to  meet 
the  problems  of  railroad  operation,  maintenance 
and  extension. 

By  private  capital  I  mean  the  funds  obtained 
from  private  investors  —  which  is  the  source  from 
which  all  business  of  the  country  derives  its  sup- 
port. Such  funds  will  naturally  seek  the  invest- 
ment or  security  which  promises  the  highest  rate 
of  interest  without  danger  of  losing  the  principal. 
It  follows  that  the  credit  of  the  railways  can  only 
be  maintained  by  earnings  sufficient  to  make 
investments  in  their  securities  as  attractive  as  those 
offered  by  other  business  investments. 

The  rationale  of  this  situation  is  well  stated  by 
the  Hon.  Franklin  K.  Lane  as  follows: 

"If  our  commerce  is  to  grow  and  trade 
is  to  be  fluent,  if  we  are  to  continue  as 
a  multitude  of  interdependent  communi- 
ties and  individuals,  if  we  are  to  give  the 
world  the  benefit  of  the  great  resources  of 
this  country,  and  put  to  its  highest  use 


f 


the  genius  for  industrial  development 
which  our  people  manifest,  our  existing 
lines  of  railroad  must  be  made  profitable 
to  their  owners,  and  money  must  find  that 
investment  in  railroads  is  both  attractive 
and  secure.  A  regulating  body  which  is 
not  fair  to  those  who  have  invested  their 
money  in  a  public  utility  does  infinite 
damage  to  the  community  that  it  is  at- 
tempting to  serve.  To  be  just  to  the 
stockholders,  however,  does  not  mean  that 
injustice  must  be  done  the  public.  The 
traffic  manager  may  not  ask  all  that  the 
traffic  will  bear  without  doing  his  rail- 
road in  the  end  a  great  wrong,  nor  can 
the  shipper  hope  to  have  lasting  benefit 
from  any  injustice  done  to  those  who 
have  put  their  money  at  the  public 


service." 


Obviously,  the  experiment  of  government  regu- 
lation must  prove  a  failure  if  it  forces  down  the 
net  income  of  the  railways  to  such  an  extent  that 
new  capital  needed  for  extensions  and  improve- 
ments cannot  be  secured.  This  may  be  done  not 
only  by  reducing  rates  but  by  imposing  conditions 
which  largely  increase  the  expense  of  operation. 

After  all  unjust  discriminations  are  removed, 
and  the  rates  are  such  as  do  not  obstruct  the 
movement  of  traffic,  the  first  interest  of  the  public 
is  that  railway  earnings  shall  be  sufficient  to  give 
the  railways  first-class  credit  in  the  money  markets 
of  the  world,  for  it  is  only  by  such  credit  that  ade- 
quate transportation  facilities,  by  means  of  private 
capital,  can  be  secured. 

It  is  far  better  for  the  business  of  the  country 
that  railway  earnings  should  be  sufficient  to  main- 
tain such  credit  than  that  any  mere  reductions 
in  rates  should  be  made  which  might  impair  that 


20 


credit.  Concretely  stated,  it  is  far  more  import- 
ant to  the  public  interest  that  the  money  neces- 
sary to  furnish  adequate  transportation  facilities 
should  be  expended  by  the  railways  for  that  pur- 
pose than  that  tariff  reductions  should  be  made  to 
the  extent  of  the  interest  rate  upon  that  money. 

The  first  consideration  of  the  rate-regulating 
power  should  be  to  secure  the  most  efficient  trans- 
portation facilities  for  the  public,  and  obviously 
it  should  avoid  any  policy  or  action  tending  to 
cripple  the  railways  or  lessen  their  ability  to 
perform  their  public  service. 

When  all  unjust  discriminations  are  abolished 
and  resulting  rates  are  such  that  all  traffic  freely 
moves  between  points  of  production  and  market 
destination,  such  rates  are  certainly  not  unrea- 
sonable to  the  public,  even  though  they  produce 
large  railway  earnings,  and  if  such  earnings  are 
actually  required  as  a  basis  for  obtaining  the  new 
capital  needed  for  extensions  and  betterments, 
why  should  they  not  be  allowed?  Why  should 
there  be  an  effort  on  the  part  of  the  governmental 
authorities  to  force  these  rates  down  to,  or  nearly 
to,  the  point  where  the  courts  would  enjoin  the 
reduction  because  confiscatory?  The  shipper  has 
no  real  complaint  if  he  is  on  an  equality  with  all 
other  shippers  and  his  merchandise  readily  moves 
at  the  higher  rate  which  insures  him  the  most 
efficient  transportation  facilities.  To  bring  the 
rate  down  nearly  to  the  point  of  confiscation,  and 
thus  prevent  the  needed  extensions  and  improve- 
ments in  transportation  service  required  by  the 
shipper,  is  an  actual  detriment  to  the  shipper  and 
therefore  to  the  public. 

What  I  have  said  may  not  be  dismissed  as  a 
partisan  argument  advanced  by  a  railroad  official 
for  I  am  fully  sustained  by  what  was  said  by  Judge 
Prouty  in  a  recent  public  address  and  I  take  the 
liberty  of  further  quoting  from  him  as  follows: 

21 


"The  two  original  purposes  *  *  * 
of  this  (Interstate  Commerce)  act  were, 
first,  to  prevent  discrimination;  second, 
to  make  rates  reasonable.  *  *  . 

"I  think  those  two  purposes  of  the  act 
to  regulate  commerce  have  been  in  the 
main  accomplished  *  *  *. 

"What  I  may  term  the  danger  point  in 
the  railroad  situation  has  very  radically 
changed  in  the  last  25  years.  Twenty- 
five  years  ago  the  danger  point  was  the 
discrimination.  Twenty-five  years  ago 
the  danger  point  was  the  unreasonable 
rate.  Today,  in  my  opinion,  neither  of 
those  are  danger  points.  The  danger 
point  today,  I  think,  is  the  inadequate 
service,  and  the  inadequate  facility. 

"Now  I  am  speaking  to  business  men. 
I  believe  you  will  agree  with  me  that  the 
service  and  the  facility  are  of  more  im- 
portance to  you  than  any  slight  difference 
in  rate.  You  want  your  cars.  You 
want  reasonable  expedition.  You  want 
everything  which  goes  with  an  efficient 
service,  and  that  you  must  have  *  *  * 

"I  think  that  today  it  is  just  as  much 
the  duty  of  the  commission  to  see  that 
the  railroads  are  given  reasonable  rates 
which  will  yield  to  them  a  fair  return,  as 
it  is  to  see  that  no  unreasonable  rate  is 
charged  to  the  shipper,  and  I  believe  this 
is  in  the  highest  interest  of  the  shipper 
himself  *  *  *  . 

"When  you  reduce  the  rates  of  the  rail- 
roads of  this  country  to  a  point  where 
they  no  longer  yield  a  profit,  you  have 
destroyed  the  value  of  their  property, 
you  have  annihilated  their  credit,  and  you 
have  made  it  absolutely  impossible  for  the 

22 


railroads  to  provide  the  service  which  you 
must  have. 

"I  ought,  as  a  member  of  the  Interstate 
Commerce  Commission,  in  passing  upon 
the  reasonableness  of  a  rate,  to  bear  in 
mind  the  fact  that  that  property  has  been 
dedicated  to  the  public  use  upon  the 
theory  that  it  is  to  enjoy  a  fair  return. 
But  if  I  were  to  lay  out  of  view  entirely 
the  interest  of  the  railroad,  if  I  were  to 
consider  your  interest,  and  your  interest 
alone,  it  would  still  be  my  duty,  and  my 
highest  duty  to  you,  to  allow  the  railroad 
a  sufficient  rate  so  that  it  might  from  that 
rate  obtain  the  needed  revenue  with 
which  to  develop,  with  which  to  main- 
tain its  credit,  with  which  to  give  you  the 
service  which  you  must  have,  and  which 
you  cannot  otherwise  enjoy  *  *  *  . 

"In  the  past,  as  a  rule,  the  orders  of 
the  Commission  have  been  in  reduction  of 
rates  rather  than  in  permitting  their 
advance  *  *  *  .  But  this  is  a  time 
of  change,  and  no  man  can  forecast  the 
future.  The  cost  of  living  is  advancing. 
The  cost  of  almost  everything  which  a 
railroad  buys  is  increasing.  Wages 
which  they  must  pay  are  increasing. 
*  *  *  So  I  say  to  you,  gentlemen, 
that  no  man  can  foretell  whether  in  the 
years  to  come  it  will  be,  or  will  not  be, 
necessary  to  allow  some  increase  in  the 
transportation  charges  of  our  railroads. 
What  I  desire  you  to  remember  is  this: 
That  if  that  time  comes,  it  will  be  the 
duty  of  the  commission  to  permit  that 
advance.  That  would  not  only  be  an  act 
of  justice,  which  you,  as  believers  in  the 
square  deal  would  approve,  but  would 


23 


also  conserve  in  the  highest  degree  your 
interest  as  shippers. " 

In  what  Judge  Prouty  has  thus  said  I  believe 
he  represents  the  spirit  and  thought  which  actu- 
ates his  colleagues  as  well  as  the  railroad  com- 
missions of  the  different  states  in  the  discharge 
of  their  official  duties,  and  from  this  I  argue  that 
the  railroads  need  not  fear  injustice  which  at  the 
same  time  would  cause  a  greater  injustice  to  the 
best  interests  of  the  whole  country. 

We  cannot  doubt  that  when  these  considera- 
tions are  generally  understood,  as  they  are  com- 
ing to  be  and  will  be,  the  public  interest  in  these 
matters  will  receive  protection  at  the  hands  of  the 
railway  commissions  of  the  country.  I  do  not 
think  it  possible  that  the  railway  commissions 
will  deliberately  or  purposely  embarrass  the  rail- 
ways to  prevent  them  from  obtaining  the  private 
capital  required  for  their  needs;  in  other  words, 
to  make  the  experiment  of  government  regula- 
tion a  failure  in  order  to  bring  about  government 
ownership  of  the  railways.  I  do  not  believe  that 
government  regulation  will  be  made  a  failure 
because  of  the  deliberate  purpose  of  railway  com- 
missions to  make  it  so.  All  that  is  needed  is  a 
thorough  understanding  of  the  situation,  not  only 
by  the  railway  commissions  but  by  the  railway 
officials  themselves,  and  it  is  the  clear  duty  of  the 
latter  to  aid  in  every  reasonable  way  the  railway 
commissions  in  their  work.  As  I  have  said,  the 
railway  officials  have  good  reason  to  accept  this 
regulative  function  on  the  part  of  the  government, 
but  this  function  involves  many  difficult  and  com- 
plex questions  which  can  only  be  solved  rightly 
and  for  the  best  interests  of  all  by  the  thorough 
co-operation  of  railway  officials  with  the  railway 
commissions. 

The  office  of  a  railroad  commissioner  is  one  of 


24 


high  responsibility.  I  believe  no  other  office  in 
our  government  is  more  important.  It  requires 
great  ability  and  no  one  can  be  well  qualified  for 
this  position  without  training  and  experience  and 
such  independence  of  character  as  makes  the 
official  indifferent  to  mere  political  preferment. 
The  tenure  of  office  and  salary  paid  should  be 
such  that  there  would  be  no  difficulty  in  obtaining 
for  these  places  the  best  qualified  men  in  the 
country.  The  work  thus  far  done  by  the  railway 
commissions,  state  and  federal,  while  largely  pre- 
liminary or  formative,  gives  earnest  of  the  per- 
manent value  of  this  governmental  function. 
The  public  is  coming  to  recognize  its  importance 
and  no  doubt  will  insist  upon  any  changes  either 
in  the  law  or  in  its  administration  which  are  neces- 
sary to  make  the  experiment  of  public  regulation 
a  success  rather  than  a  failure. 

I  have  aimed  briefly  to  point  out  the  import- 
ance, not  only  to  the  railways  but  to  the  public, 
of  government  regulation  of  railways.  I  have 
shown,  I  think,  that  without  such  regulation 
neither  the  public  interest  nor  that  of  the  railways 
was  fully  protected.  Some  measure  of  regula- 
tion was  therefore  necessary.  It  may  be  that  the 
regulation  which  has  ensued  has  gone  beyond  the 
best  and  wisest  limits,  but  I  do  not  think  it  ma- 
terial to  raise  that  question,  for,  after  all,  a  wise 
and  enlightened  administration  of  the  present 
laws  upon  this  subject  will,  I  am  satisfied,  be 
successful;  whereas,  the  best  laws  possible  would 
result  in  failure  if  unwisely,  ignorantly  or  viciously 
administered.  So  the  administration  of  our  pres- 
ent laws  is  the  all  important  thing,  and  that,  of 
course,  largely  depends  upon  the  men  who  con- 
stitute the  Interstate  Commission  and  the  rail- 
road commissions  of  the  different  states.  There 
are  possible  conflicts  between  the  national  and 
state  authorities  which  may  only  be  solved  by 

25 


additional  legislation  but  in  good  time  that  will 
be  provided,  if  necessary.  And  while  the  leading 
responsibility  for  success  or  failure  of  government 
regulation  must  rest  upon  the  railway  commissions, 
I  have  frankly  stated  that  the  railway  officials 
cannot  escape  a  large  responsibility,  and  their 
duty  is  plain  to  co-operate  with  and  aid  the  gov- 
ernment officials  in  every  reasonable  way.  Where 
the  officers  of  the  government  go  beyond  the 
limits  of  constitutional  power,  and  such  acts 
affect  the  vital  interests  of  the  railways,  there  is 
no  recourse  other  than  an  appeal  to  the  courts 
of  the  country.  But  I  hope  the  period  of  litigating 
questions  of  constitutional  law  upon  this  subject 
has  largely  passed  and  that  the  effort  of  all  officials 
and  parties  interested  will  henceforth  be  loyally 
devoted  to  solving  the  question  at  hand  in  the 
best  interest  of  the  public,  for,  if  that  is  done,  I  am 
certain  that  the  railway  interests  will  be  fully 
protected. 


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